GUIDE: FUND YOUR BUSINESS | OPTION TWO:
Friends & Family Funding
We know what you might be thinking — how can I ask for money from friends and family to start my business without making it awkward? Luckily for you, we have a few tips you can use to make it less awkward, less stressful, and have a better chance at maintaining the relationship if you aren’t able to pay the money back.
Choose Your Strategy
There are two main strategies you can use: solicit large chunks of money from a few people, or a small amount from a lot of people. There are benefits and disadvantages to both, so let’s discuss.
You are less likely to ruin a relationship over $25… but $25k, that’s a whole other animal. With a small ask, there is a lot less stress put on someone regardless of their answer, and you may receive the funding faster as well. Now, you more than likely won’t receive a contribution from everyone you ask, so you need to adjust the amount of people you are requesting money from.
So if your goal is to raise $5k at $100 investment per individual, you will need to convince 50 people to help you out. If roughly only 10-20% actually invest in your company, that means you will need to speak with 250-500 people just to obtain the 50 people who will actually pay.
If you decide to ask only a handful of people for larger sums of money, there will be a lot more planning needed. This option can work if your network has the funds to support you, just know that it may take a little longer to receive them, and/or there may be more strict timelines you need to follow to pay back those funds.
Choose an Investment Type
When you accept money from others, strings will be attached, no matter how you structure the transaction. Some things you should consider when choosing an investment type:
Accept and pay back loans:
Loans can be great because you receive the funds you need, but they have to be paid back on a set deadline. This can impact cash flow and overall profitability. If you went with smaller asks from friends and family, you would be juggling more loans than if you had only asked a few people.
Offer an equity stake:
If you take on investors, you will have to give up a portion of your company. Regardless if it is a friend or a family member, they will eventually want a return on their investment. This could mean eventually selling the company, buying back shares or paying out dividends.
Offer a token of thanks:
Money can be considered a gift, and that’s exactly how you should thank family members/friends if you go this route. If the funding you are receiving will not be considered a loan or equity stake, you should get into writing that the funds are a wonderful gift and NOT an investment or promissory note.
Write Down Your Pitch:
More than likely, your friends and family won’t want to read through a 50 page business plan. You will probably have better luck sitting down at a coffee shop with them and explaining your idea on a very personal level. You could also try to write up a short 5-10 page document explaining what you will do, how you will do it, and where the funds will go. This short summary will ensure the friend/family member understands the risks/rewards before giving you the funding.
Keep Your Documents and Communications Business-Like:
It’s going to be awkward explaining profit/loss statements to your weird Uncle Walter, but it’s just something you will need to get used to as long as he is a part of your business. Make sure to structure, document and manage these investments just like you would with any other kind of investor — not only to make sure you are on the same page throughout the business relationship, but to make things more clear should a legal dispute occur.
Typically, family and friend investors are a lot more patient than professional investors. If you miss goal A and goal B isn’t looking too good, a professional investor may be on your case to get back on track immediately. A family member or friend may understand that “things happen” and will keep encouraging you to keep trying.
It’s a good idea to keep your friends/family investors in the loop about your progress. Perhaps you send them a monthly email, or a meetup for coffee. Regardless of how you choose to stay in touch, it’s important you do. If you find yourself at a loss of how to move forward, having a good relationship with your investors will allow you to receive more advice from them, and perhaps, a connection to someone in their network who can help.
Want to save this information for later?
Enter your email and ZIP Code below and we will send the Start a Business Guide to your email inbox for FREE!
NOTICE: The information included on this website is to be used only as a guide. It is not intended to cover all provisions of the law or every taxpayer's specific circumstances.
GUIDE: FUND A BUSINESS
Connect with Us!
Get insights, inspiration and events to help you start, grow and accelerate businesses in Iowa.